Measuring the impact of special or concessionary tax rate policies on corporate income tax revenue of Sri Lanka

Abstract

Introduction

The corporate income tax (CIT) is the main direct tax of Sri Lanka. In recent years, it accounted for 9.2 % of total tax revenue and 52 % of income tax revenue of Sri Lanka. One important issue in CIT in the case of Sri Lanka is its gradual decline reported over time as a percentage of GDP. In the early 1980s and early 1990s, the ratio approached 2.5 % and later recorded a gradual decline to about 1% in recent years. At a given marginal corporate income tax rate, it is expected that CIT revenue will increase in line with the expansion of the GDP. But, the declining trend of CIT revenue as a ratio of GDP indicates that CIT revenue does move in line with the growth of the economy. Jayawickrama (2008) and Madushani and Jayawickarama (2014) show that the income elasticity of the CIT is relatively low in Sri Lanka which indicates the failure of the tax to track GDP closely.

The government of Sri Lanka has granted concessionary /special CIT rates according to the company size and sector to achieve objectives such as the promotion of local and foreign investment, protection of the companies at their early stage to compete the market competition, promotion of agricultural production, promotion of small and medium scale companies and elimination of regional development disparities etc etc. (Wijesinghe, Ekanayake and Mahendra (2013)

Special tax rates or concessionary tax rates granted for different sectors or companies by Sri Lankan governments may be expected to reduce the tax revenue collected in the short run and to expand the sector at a higher growth rate in the long run. Many reseachers argue that the declining tax/GDP ratio is mainly due to tax exemptions, concessionary tax rate policies etc. (Jayawickrama, 2008; Amirthalingam, 2013; Hettiarachchi and Jayawickrma, 2018). However, no studies have computed revenue loss due to exemptions or concessionary tax rate policies granted by the government for different sectors with a view to enhance the growth of the economic activity or the sector.